A Comprehensive Guide to Cargo Insurance
Updated: Apr 3
Dealing with international and domestic shipping is a challenge for any business owner. From global air and ocean deliveries to interstate trucking and complex multi-modal movements, risk mitigation is an integral part of every shipping strategy. Cargo insurance is an essential part of risk management, and multiple coverage options are available to serve diverse business interests.
Let's take a detailed look at cargo insurance to help you understand liability and avoid the pitfalls of insufficient coverage.
Two crucial notes about cargo insurance before we begin
While importers and exporters struggle with risk every day, stories of damage and loss are often kept under wraps by the transportation industry. As you read the following guide, it's important to keep these two points in mind:
Default cargo coverage is extremely limited: There is a distinct lack of coverage associated with the commercial transportation industry. Whether your goods are coming or going by ship, airline, or truck, liabilities are often vague, dependent, and restricted. Ocean carriers, airlines, truck brokers, terminal operators, and CFS warehouses all have extremely limited coverage, which makes customers liable for the vast majority of losses.
The general average provision makes you liable: While carriers don't talk about it much, the general average concept can have a huge negative impact on your business. If damage or loss occurs during the shipping process, general average can be declared. When this happens, the ocean carrier or transportation company avoids liability completely, with losses averaged out and all stakeholders held responsible. Not only are you liable for the cargo of others, but you may also be liable for the ship itself. The general average concept will be covered later in this guide.
What is cargo insurance?
Cargo insurance is also known as transit insurance, marine cargo insurance, and shipping insurance. While coverage details vary widely between providers and contracts, this type of insurance is designed to target specific cargo risks such as cargo loss, cargo damage, delayed shipment costs, and non-delivery by a carrier. There are multiple types of cargo insurance available, and different options are viable depending on the type and size of the freight along with the transportation method used.
Why is cargo insurance important?
Increased globalization and international trade affect a wide range of industry sectors. From small parcels to container units and entire vessels, goods move around the world at a faster rate than ever before. Cargo insurance plays a vital role in this process, with a range of mechanisms available to help protect and compensate business entities in the case of lost or damaged freight.
From a commercial perspective, a shipment is not complete until the goods have been signed off on the other side. Cargo insurance policies allow business owners to protect themselves when something goes wrong.
How to value cargo insurance?
Working out the value of cargo insurance can seem like a complex exercise, but it's really quite simple. In most situations, insurance providers will calculate the insured value by adding the FOB (free on board) value to the freight cost and then adding 10% to the total. While higher margins are available on request, this system is normally enough to cover most shipments. For example, if your goods are worth $20,000 and your freight costs are $3,000, your cargo insurance will have a value of $25,300.
Types of cargo insurance
Just like other forms of insurance, not all cargo coverage is created equal. Before you organize a shipping contract, it's important to understand key differences between insurance types. Cargo insurance can be categorized based on the method of transportation, including the following three types:
Road or surface transportation insurance
Air transport insurance
Marine cargo insurance
However, it's important to note that cargo insurance coverage is inclusive of multiple methods of transportation used by a single transportation provider. While the cost of insurance is dependent on several factors, including cargo value, origin, destination, and mode of transport, you are typically insured for the entire journey. When you take out an insurance contract, you are covered from point A to point B, regardless of what vessels are used in between.
Despite key differences between transportation types, cargo insurance is typically categorized according to coverage details. There are three types of cargo insurance according to the Institute Cargo Clauses (ICC):
Type A, also known as all-risk insurance
Type B, also known as with average insurance
Type C, also known as free of particular average insurance
Each type provides a different level of coverage during transportation, loading, and unloading, including bad weather, piracy, and many other relevant risk factors. From comprehensive all-risk coverage to specific and partial losses, the following types of cargo insurance are common:
Type A insurance that includes all-risk clauses
All-risk protection provides comprehensive insurance coverage in the case of multiple adverse events. This type of insurance is intended for approved or general goods, and it offers coverage for most common perils. To take out an all-risk policy, your merchandise needs to be new, export packed, and not unusually susceptible to losses. While this form of coverage offers reliable protection against physical loss or damage from any external causes, it is associated with a number of exclusions.
The following exclusions apply for all-risk cargo insurance policies:
Cargo abandonment or disposition
Improper non-export packaging
Rejection of goods by customers
Rejection of goods by Customs or other Government agencies
Failure to make payments or collect accounts
Loss due to nature of cargo — spoilage, infestation, failure
The change, transfer, or dishonesty of employees
Loss caused by delay — deadline coverage can be arranged separately
Loss of use and/or market — deadline coverage can be arranged separately
Losses that exceed coverage limits
Losses at port city more than 15 days after discharge — can be modified ahead of time
Losses inland more than 30 days after discharge — can be modified ahead of time
Losses in South America after 60 days — can be modified ahead of time
Oceangoing barge movements — unless specifically endorsed
Goods subject to on-deck billing
Loss caused by fluctuating air temperature — air freight only
Failure to notify air carrier of initial losses on time — 7 days for damage, 14 days for hidden damage, and 120 days for non-delivery
Type B insurance that includes with average (WA) clauses
WA is an ocean marine policy provision that covers total loss events along with the partial loss of below deck cargo. With WA coverage, the partial loss of below deck cargo is treated as a total loss scenario, regardless of how much is damaged or lost. WA coverage is often taken out to extend Type C contracts, as it provides additional protection from extreme weather events. WA coverage can also be extended to include theft, pilferage, and non-delivery.
Type C insurance that includes free of particular average (FPA) clauses
Also known as a named perils policy, FPA is a specialized ocean marine policy provision that does not cover partial loss events. This is a type of 'free from partial loss' coverage. FPA coverage is often called 'total loss only' because the insurance holder is only protected in the case of total loss events.
FPA policies are typically used to cover perils of the sea, including sinking, stranding, fire, or collision. However, these policies will also cover land perils that are beyond human control, including earthquakes and bad weather events. FPA policies are often taken out for used merchandise, waste materials, and bulk cargo.
Additional cargo insurance options
War risk coverage: Dedicated war risk coverage is an option available from some providers, especially for marine cargo insurance policies. This companion policy features an additional premium to cover war and related risks, including hostile actions and leftover mines. War risk coverage rates are higher in parts of the world associated with hostile events.
Duty insurance coverage: This insurance eliminates duty and taxation requirements for goods that have been partially damaged in transit. While goods lost in transit do not accrue duty and taxation, the duty on damaged goods can be significant. Duty coverage is typically around one-third of the cargo insurance rate, although dedicated IR tax coverage can be higher.
What is the general average principle?
General average is a traditional maritime concept that basically means general loss. Depending on the outcome of an adverse event at sea, loss or damage is shared proportionately by all parties with a financial interest in the voyage. While this might sound simple enough, it can be a disastrous outcome for individual stakeholders.
If you have suffered damages, you are unlikely to see compensation for a very long time due to the complexity of the general average process. If you have not suffered damages, you may be liable for compensation to third parties and even the carrier itself.
The importance of general average protection cannot be underestimated. Whether you have Type A, B, or C coverage, avoiding general average liability is the primary reason for taking out a cargo insurance policy. Without general average coverage, you’re fully liable for your portion of the total claim amount, which can be higher than the value of your cargo.
How to file a claim for cargo insurance
When you have appropriate cargo protection, filing a claim is a daunting yet fairly straightforward process. If damage or loss has occurred, you must file and attempt to settle the claim under the terms of the relevant insurer. If the damages happened in another country, they must be settled under foreign law and administered under foreign insurance terms and conditions.
The following steps are typical, and many insurance companies take care of the entire process past the first step:
If you are notified of loss or physical damage, contact your insurance company or call the claims adjuster shown on your policy.
File a written note of your intent to claim within the allotted time period. This varies considerably, from 7 days for air shipments to 1 year for ocean shipments.
Contact the claims adjuster, who will survey your goods and write up an estimate. It's important to pay and cooperate with the adjuster fully to speed up the reimbursement process.
Once the adjuster has completed the survey, it's crucial to file the claim for damages with your insurance company immediately to avoid delays.
Cargo insurance provides valuable protection and peace of mind for any business entity involved with shipping. A cargo insurance policy is needed for general average liability protection, with additional risk factors also covered based on the provisions of each contract. If you would like to learn more about cargo insurance, please contact us.